HSBC’s King Says Pound Crisis Always a Risk for U.K.

By Jennifer Ryan

Oct. 16 (Bloomberg) -- Britain faces the danger of a currency crisis after policy makers allowed the pound to become “seriously undermined,” HSBC Holdings Plc Chief Economist Stephen King said.

“There’s always a risk of a sterling crisis, particularly about where we are currently,” King said in an interview at an HSBC conference in London yesterday. “It clearly is already a currency that’s been seriously undermined.”

Since the start of 2008, Britain’s swelling government debt has prompted the pound to drop about 17 percent against the dollar and more than 20 percent against the euro. Sterling touched a four-month low against the dollar in September after Bank of England Governor Mervyn King said that the currency’s decline was “helpful” in rebalancing the economy.

The pound is “extremely weak,” HSBC’s King said. “Part of this is the benign neglect on behalf of policy makers who were quite happy in a sense to see sterling falling. The problem with admitting that you’re happy about it is that a small fall can turn into a very large fall, so yeah, there’s definitely a danger there.”

Paul Fisher, the bank’s markets director and its former head of foreign exchange, said in an interview published in the Financial Times yesterday that the bank’s comments on sterling have been backward looking, and policy makers try not to comment on future currency movements.

Currency Forecasts

HSBC’s King said the pound and the dollar may stay “weak” for the next 12 months. The U.K. currency strengthened against the euro today and headed for its biggest weekly gain in more than four months. Against the dollar, it traded close to a two- week high. The pound was at $1.6343 and 91.29 pence per euro as of 9:34 a.m. in London.

“Investors are becoming more and more concerned about the fact that these countries have big budget deficits, have rapidly rising government debt-to-GDP ratios, have extremely loose monetary policy,” he said. “The risk for the next year or so is that the dollar and sterling remain extremely weak and possibly get even weaker, particularly against the emerging currencies but possibly also the yen and the euro.”

The bank said at its October decision it would finish spending all 175 billion pounds ($286 billion) allotted to its bond purchase program by its next meeting, and kept the key interest rate at a record low of 0.5 percent.

‘Panic’ Risk

HSBC’s King said the central bank should signal at its next policy meeting in November an intention to continue its bond- purchase program, even if it doesn’t announce an increase in the program’s size. An announcement to end the purchases could spark a “panic” among investors, he said.

“If you’re in a situation whereby you ended the process and stopped doing any more and the market started to panic as a result of that, you could get a sort of unintended adverse consequence whether it would be a spike up in bond yields or whatever that might undermine the performance of the economy more broadly,” he said. “I personally would like them to have a signal that policy remains loose for quite a long time.”

The bank’s previous signals that it may consider ending the program sparked losses in government bond markets. The yield on the 10-year gilt rose to the highest level in almost six weeks July 23 after Bank of England policy maker Andrew Sentance said the bank may pause the bond program if necessary.

Monetary policy may stay looser “than would otherwise be the case” if the U.K. government opts to tighten fiscal policy, King said.

“Monetary and fiscal policy in a sense have become one and the same thing,” King said. “The distinction that one used to have doesn’t really exist any more because they are sort of combined together. The sequencing of how you exit from the current position is very, very important and I personally prefer more action on fiscal policy on monetary policy.”

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net